GBP/USD: what will happen to cable after the election?
The pound has surged ahead of the UK election based on the Conservative Party securing a majority, but anything other than this outcome will bring a significant downside for sterling.
Sterling strength has been intrinsically linked with the likeliness of a conservative victory over the course of 2019, with the rise in polling helping drive GBP/USD higher as we head into the election.
That signals a likely surge for the pound in the event of a conservative majority, despite the ultimate uncertainty that will come in relation to Johnson’s potential inability to achieve a trade deal by the end of 2020.
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Conservative majority could see GBP/USD hit new high
A conservative majority would be expected to bring a surge for GBP/USD, driving the pair into a new 2019 high above the 1.3382 peak from March.
On the flip-side, anything other than a Conservative victory would likely bring substantial downside for the pound. Should we see a hung parliament, the likeliness is that we would be looking at a move back towards the 1.270 lows in the immediate aftermath.
This would be in response to the immediate uncertainty involved, either a Labour led coalition coming to pass, or a Conservative coalition which would likely require the scrapping of the current Brexit deal. Therefore, the aftermath would likely depend on exactly who will form a government.
Labour victory could see sterling plummet
Finally, we would likely see a sharp decline in the pound in the event of a Labour victory, with the prospect of capital flight hurting the economic outlook going forward.
That short-term decline would similarly point towards a possible move back into the 1.270 November lows and even back down to 1.250.
However, those losses could be lessened in time if a coalition was formed that may reduce the severity of future tax hikes. It is also worth noting that a likely second referendum would signal a pound positive reversal of article 50 or softer form of Brexit.
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